Puts and Calls: Bad news for AIG is bad news for taxpayers

Tom Karol

AIG sale of Asian unit dead: U.K. Prudential’s agreement to buy the Asian unit of AIG fell apart after Prudential shareholders rejected the $35.5 billion price and AIG rejected a reduced offer of $30.4 billion. AIG’s chief executive was in favor of the lower bid, but the AIG board met late Monday, and killed the deal. Reportedly, AIG’s board wanted assurances that Prudential would complete a revised deal, and Prudential could not provide that assurance. The Treasury Department, which owns 80 percent of AIG and has control of the board seats, had not considered any alternative other than the existing $35 billion contract. The $35 billion payout would have erased nearly a third of the amount taxpayers are owed by AIG. As a result of the failed deal, the U.K. pound rose to its strongest level in almost three weeks against the dollar. The takeover’s collapse “is sterling plus, the implication being that there won’t be sales of sterling to buy foreign currencies,” said the head of European hedge-fund sales at Mizuho Corporate Bank in London.

What will AIG do now? Before the Prudential deal, AIG was considering selling the Asian unit in an initial public offering on the Hong Kong exchange, and resurrecting the IPO is now AIG’s plan. The problem is that the Hong Kong market for insurance stocks has softened. Anumber of Chinese banks are already seeking to raise capital and these deals are in the pipeline for later this year. Like Prudential deal, international insurance regulators will be examining the beginning and ending capital positions of potential acquirers. That means AIG is less likely to get the price it initially expected from the public offering. “The world’s different now. Insurance stocks are all trading below book value,” according to a property and casualty insurance researcher for Keefe, Bruyette & Woods. “It’s certainly a setback from the taxpayers’ point of view.” AIG may now revive a planned initial public offering of AIA. But there are doubts about whether an IPO could fetch the same valuation as that offered by Prudential. Best estimates for a successful IPO expect about $15 billion, or less than half of the lower offer rejected by AIG.

Citi unit preparing for sale: In December 2009, the government converted the $20 billion owed to in by Citigroup, into common shares. Two weeks ago, the government sold 1.5 billion of those Citi shares for $6.2 billion, at a profit of $1.3 billion. On Wednesday, the Wall Street Journal reported that Citi plans to split its mainly subprime consumer-lending unit in the U.S. into two segments, and rename it later this year, in preparation to sell off that unit. The unit, CitiFinancial, will also close 330 branches in 48 states and shut down 46 branches.

Bar the car czar? According to the New York Times, the SEC has been pushing to bar Steven L. Rattner, a former senior adviser to the Obama administration on the auto industry, from working in the securities industry for up to three years. The SEC and the New York attorney general have suggested that Rattner improperly paid off a political operative to win lucrative business from the New York state pension fund. The private equity firm Rattner co-founded has stated, “We wholly disavow the conduct engaged in by Steve Rattner, who hired the New York State comptroller’s political consultant, Hank Morris, to arrange an investment from the New York State Common Retirement Fund. That conduct was inappropriate, wrong and unethical.” The private equity firm has settled the charges, but Rattner has not agreed to the settlement. The SEC must now determine whether to pursue civil action.

But does he like it? William Isaac, former chairman of the Federal Deposit Insurance Corp. and newly appointed non-executive chairman of Fifth Third Bancorp, was asked about the financial reform bill soon to be in conference on the Hill: “The current financial reform bills in the House and Senate would not have prevented the 2008 crisis and will not prevent the next one. In fact, by further politicizing the bank regulatory system and not making meaningful reforms in it, these bills make the next crisis more likely. And by curtailing the ability of the Fed and FDIC to act to stabilize the financial system, the bills make it more likely that the next crisis will spin out of control. Neither the House nor Senate bill is worthy of passage and both will do more harm than good. Any member of Congress who voted for TARP and votes for financial reform along the lines of the bills under consideration should be given his or her walking papers. The current bills are campaign documents, not serious financial reform measures.”